by Andrea Plunkett
While most of us were ringing in the New Year last week, Congress was in session to clean up a mess and negotiate a deal to avert the nation's impending “fiscal cliff” – a series of automatic tax hikes and spending cuts passed in 2011 and set to take effect Jan. 1, 2013.
At 2 a.m. on New Year's Day, Senate Republicans and Democrats finally came to a compromise to avoid some, but not all, of those tax hikes. The bill would later pass the House by a wide margin.
Although the fiscal cliff bill passed with bipartisan support, the compromise left much to be desired for legislators in both parties. Some Democrats voiced concern that the bill raised the upper tax bracket from being defined as someone earning $250,000, to someone earning $400,000, and that as a result many high earners wouldn't be paying their “fair share.” Many Republicans fought the bill because it didn't include significant spending cuts.
In Missouri, the delegation was split on whether the bill was a good deal for taxpayers. Republican Senator Roy Blunt and Democrat Claire McCaskill both voted to pass the bill. In the House, Republicans Jo Ann Emerson and Blaine Leutkemeyer and Democrats Emanuel Cleaver, Russ Carnahan and Lacy Clay all voted yes. Republicans Todd Akin, Vicky Hartzler, and Billy Long voted no. Republican Sam Graves did not vote.
For his part, President Barack Obama was satisfied with the compromise. Before Obama left for Hawaii for a family vacation, he voiced his approval of the bill in a White House briefing. “A central promise of my campaign for president was to change the tax code that was too skewed towards the wealthy at the expense of the working middle-class Americans.”
But is that true? Is the middle-class better sheltered from tax increases than they were before?
Indeed, the top federal income tax rate will rise from 35 to 39.6% for those making over $400,000, but those making less than $400,000 who have already received a check in 2013 may have noticed something missing—2% of their income. The fiscal cliff deal did not extend the Social Security Payroll Tax holiday, which means that every worker, regardless of their tax bracket, will see their share of social security taxes rise from 4.2% to 6.2% this year. As a result, households earning $50,000 per year will take home $1,000 less this year.
Taxes have also risen in other areas. The estate tax has ballooned to 40%, although the first $5 million of an individual's estate is exempt from the tax. Tax rates on dividends and capital gains over $400,000 will rise to 20%.
The effect of the bill's changes extends to tax credits and unemployment benefits as well. The child, earned income and college tuition tax credits were set to expire, but the new legislation extends them for five more years. The bill also extended unemployment benefits that were set to expire. Unemployment will continue to be available for up to 99 weeks.
While most people will see their taxes rise as a consequence of the compromise, there are a few select groups that will benefit. The bill boasts a tax credit for plug-in vehicles, an extension on tax credits for the film industry, a seven year tax write off for “motorsport entertainment complexes” and subsidies for asparagus farmers. All in all, the total for the tax breaks in the bill comes to about $67.9 billion.
Did the bill at least move the ball forward toward resolving the country's debt crisis? It does not appear that it did. In fact, there’s reason to believe it may have made the U.S.'s future debt position even worse. According to the Congressional Budget Office, the effects of fiscal cliff compromise will add $4 trillion to the federal deficit over the next 10 years.
And there are more fiscal fights looming on the horizon in the next few months. Congress and the president have already set out battle lines for a clash over the federal budget, the debt ceiling, spending cuts and, if the parties can't come to a deal, a government shutdown, all of which may come as early as February of this year. Indeed, the U.S. may have avoided the “fiscal cliff,” but the path to fiscal solvency looks to be a very rocky road, especially in the near term.